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The California Court of Appeals held that a California statute governing the resolution of attorney-client fee disputes preempted a law firm's contractual right to demand arbitration. The Court did not address whether the Federal Arbitration Act (FAA), if applicable, would preempt the California statute.
In Schatz v. Allen Matkins Leck Gamble & Mallory LLP, No. D047347, 2007 WL 49638 (Cal. Ct. App. Jan. 9, 2007), Schatz retained Allen Matkins, a law firm, to represent him in two unrelated disputes. The retainer agreement provided for binding arbitration of all disputes.
When Schatz stopped making payments to the law firm, Allen Matkins requested payment in a letter invoking the retainer agreement's arbitration clause. In response, Schatz asserted that the dispute was subject to nonbinding arbitration under the Mandatory Fee Arbitration Act (MFAA), a California statute that entitles a client to nonbinding arbitration of an attorney-client fee dispute. Allen Matkins agreed to proceed with nonbinding arbitration.
After nonbinding arbitration concluded in Allen Matkins' favor, Schatz requested a trial de novo pursuant to the MFAA. Allen Matkins responded by filing a motion to compel binding arbitration in accordance with the retainer agreement. The trial court denied the motion.
On appeal, the issue was whether the MFAA preempted Allen Matkins' right to demand binding arbitration. Resolution of this issue turned on whether the California Supreme Court's decision in Aguilar v. Lerner, 88 P.3d 24 (Cal. 2004) had implicitly overruled Alternative Systems, Inc. v. Carey, 79 Cal.Rptr.2d 567 (Cal. Ct. App. 1998), in which the California Court of Appeals held that the MFAA does not permit a pre-dispute waiver of the right to a jury trial.
The Court concluded that Aguilar had not overruled Alternative Systems because "Aguilar does not address the substantive issue in Alternative Systems, whether a binding arbitration provision in a retainer agreement violates a client's rights under the MFAA to trial de novo after nonbinding arbitration of an attorney fees dispute." The Court reached this conclusion even though Justice Chin wrote in his concurring opinion that Alternative Systems could not survive Aguilar.
Based on its conclusion that Alternative Systems remained good law, the Court affirmed the trial court order denying Allen Matkins' motion to compel arbitration.
Neither this case nor Alternative Systems addresses the issue of whether the FAA, if applicable, would preempt the MFAA and require California courts to honor an agreement to submit attorney-client fee disputes to binding arbitration. In a concurring opinion in Aguilar, Justice Moreno referred to this issue in stating that he "express[ed] no opinion about whether a state statute that precludes binding predispute arbitration agreements of legal fees would be preempted by the Federal Arbitration Act."
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